Negotiating income-sharing ratio

Sixty-year-old Wanda Davis retired from her computer consulting business in Boston and moved to Florida. There she met 27-year-old Ava Jain, who had just graduated from Eldon Community College with an associate degree in computer science. Wanda and Ava formed a partnership called D&J Computer Consultants. Wanda contributed $50,000 for startup costs and devoted one-half time to the business. Ava devoted full time to the business. The monthly drawings were $2,500 for Wanda and $5,000 for Ava.

At the end of the first year of operations, the two partners disagreed on the division of net income. Wanda reasoned that the division should be equal. Although she devoted only one-half time to the business, she contributed all of the startup funds. Ava reasoned that the income-sharing ratio should be 2:1 in her favor because she devoted full time to the business and her monthly drawings were twice those of Wanda.

a. What flaws can you identify in the partners reasoning regarding the income-sharing ratio?

The partners divide net income in any ratio they wish. However, in the absence of an agreement, net income is divided between the partners. Therefore, Wandas conclusion was correct but for the wrong reasons. In addition, note that the monthly drawings on the division of income. These drawings are as a salary allowance, which is part of a formal income sharing agreement.

b. How could an income-sharing agreement resolve this dispute?

An income-sharing agreement could be designed to credit each partners capital account for her respective